1. Deflation By the end of this session, you:
Must know the economic costs of deflation.
Should understand the challenge facing the UK economy regarding inflation/deflation.
Could be able to answer a practice examination question on inflation and gain full marks.

3. Economic Costs of Deflation
Holding back on spending
Debts increase
The real cost of borrowing increases
Lower profit margins
Confidence and saving

4. Types of Deflation
Benign deflation
Malevolent deflation

5. Monetary Policy to Reduce the Risk of Deflation
Cut interest rates to stimulate demand
May save instead
Falling asset prices would increase the demand for cash savings
Limited effect because interest rates cannot fall below zero
Monetise the economy to avoid the liquidity trap

6. Fiscal Policy to Reduce the Risk of Deflation
Higher government spending and lower direct taxes to boost AD
Increase in national debt for a short-term boost
Low consumer and business confidence
Inflationary pressure if the economy recovers
Extra income may be used to repay debt rather than boost AD

7. Inflation What do the following mean? M x V = P x T Menu costs
Shoe-leather costs
Fiscal drag
Hyperinflation